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How Coronavirus could impact your commercial contracts

Many headlines are starting to predict the severe impact coronavirus could have on small businesses as those with a global footprint - including Jaguar Land Rover – are already admitting the virus is hitting supply chains.

Businesses will be fearful they could be dragged into expensive compensation cases in the aftermath of the growing crisis if they or their suppliers become unable to fulfil their contractual obligations.

This is likely to lead to many entrepreneurs and small business owners checking the terms of their contracts with suppliers.

But what can businesses do to protect themselves and what should they be looking out for?

We sat down with Commercial Solicitor, Rana Chatterjee, to discuss the possible legal fallout.

What are your rights and liabilities if you or your suppliers can’t satisfy contractual commitments due to coronavirus?

The rights will always depend on the wording of the individual agreement, but it is fairly common for a business to be able to procure an alternative supply of goods or services and then to have that cost met by the defaulting supplier. Under most circumstances, there is a reasonable expectation that any failure to supply may trigger a right for the other party to terminate and claim damages associated with the default.

Will a force majeure clause help?

Recently we have seen force majeure clauses being tailored so that an outbreak of disease is specifically mentioned. In most cases, depending on the severity of the disruption caused by the coronavirus, it would constitute a force majeure under a contract that has provision for this. The important thing to note is that it will be the responsibility of any business which has been unable to perform its obligations under a contract to show that it was prevented from doing so as a result of the outbreak.

Can you claim contractual frustration?

In most scenarios, this is unlikely to be applicable. This is primarily because, for the doctrine of frustration to apply, a party has to show that the performance of the contract was impossible because one of the elements essential to the contract is destroyed. In extreme cases, if a death of a key person related to the contract becomes ill or dies before they can perform their obligations, this may qualify as frustration but, in this situation, such an event would likely trigger the termination of the contract altogether.

Will you be covered by insurance?

This type of event is covered by some insurance policies in relation to contractual risks but recently concerned business owners are checking this point and, where necessary, taking out additional cover to protect themselves. As time goes on, insurance companies who see the risks as increasing may become less willing to offer the same products, but this depends on how much worse the situation gets.

What should you be doing to protect your business?

A review of their current business relationships to understand precisely how an outbreak might impact their ability to manage their day-to-day operations would be a sensible exercise. Thereafter, taking steps to establish how their existing commercial contracts would operate in these scenarios would help them to prepare for the potential negotiations and formal notices that might need to be served if a significant impact occurs.

As the effects of the coronavirus continue to grow, our solicitors are on hand to help British businesses to be prepared. If you would like to discuss any of the issues raised in this article, please contact us. Alternatively, if you have other concerns during the midst of the coronavirus outbreak, you can visit our dedicated legal support hub for businesses where we will provide you with information and resources as the situation evolves.

You may also want to read our advice centre article, Commercial Contract FAQs, on the different types of commercial contracts and the clauses, terms and conditions they could include.

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